For a considerably long time investors have been ignoring
Modarabas. There is a general perception that investing in modaraba certificates
is not attractive. While the perception may be close to reality, there are
certain good performing modarabas which offer earnings yield which is much
higher than the return from savings deposits and even Defence Saving
Certificates.

According to a report from Khadim Ali Shah Bukhari & Co.,
prepared by Nadeem Naqvi, a brief study of ten selected modarabas exhibits some
interesting observations. These ten modarabas, out of a total of over 50, were
selected on the basis of profit after tax of Rs 25 million or above posted for
the year ending June 30, 2000.

These ten modarabas posted a 6.5 per cent increase in total
income for the year 2000 amounting to Rs 2.55 billion as against Rs 2.39 billion
the year before. Gross Profit (defined as total income less funding and lease
amortization cost) rose by 7.4 per cent, although the gross margin remained
constant around 32 per cent. Similarly, operating profit (gross profit less
administration cost and modaraba company fee) rose by 4 per cent, while
operating margin slipped slightly to 27.4 per cent from 27.9 per cent during
this period.

The important difference between the year 2000 and 1999 came
under the provisioning head. For the year 1999, these ten modarabas made a
combined provision of Rs 146 million, while in 2000 they made a provision of Rs
41 million — a decline of 72 per cent. Mainly, as a result of this, the Profit
after tax for this group shot up by 26.6 per cent in 2000 to Rs 630 million from
that of Rs 497 million for the year 1999. The net margin improved to 24.8 per
cent from 20.8 per cent for the year 1999.

More interesting from an investor's perspective is the fact
that the payout by these ten modarabas increased from Rs 381 million for the
year 1999 to Rs 483 million for the year 2000 — an increase by 27 per cent.
Further, the consolidated dividend yield (prices as of January 1, 2001) for this
group rose to 25.1 per cent for the year 2000 compared to 19.8 per cent for the
previous year — not bad at all considering that the KSE-100 Index showed a
return of only 7 per cent for the year 1999.

Total certificate holders' equity rose by 3.7 per cent to Rs
3.5 billion, while total assets grew by 3.7 per cent to Rs 7.4 billion. For the
year 2000, the ROE for these ten modarabas was 17.5 per cent compared to 14.5
per cent for the previous year. The ROA came out at 8.5 per cent versus 7 per
cent respectively for the two periods.

Based on an average share price for the group (as of January
1, 2001) of Rs 7.10 and book value per share of Rs 13.17, the average price to
book ratio is 0.54x, which is an attractive value considering the very high
dividend yield. The historic PER for the group is 3.1x compared to the historic
market PER of 9.5x for the KSE-100 Index for the year 2000. This translates into
a massive earnings yield of over 32 per cent compared to 8 to 10 per cent yield
an investor can expect from savings deposits and 14 per cent on Defence Saving
Certificates.